Johannesburg, 27 Aug 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to Equity Group Holdings Limited of AA-(KE) and A1+(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until August 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Equity Group Holdings Limited’s (“EGHL” and/or “the group”) based on the following key criteria:
The accorded ratings reflect EGHL’s, formerly Equity Bank Limited’s (“EBL”), established domestic market position and growing regional footprint, supported by an inclusive consumer and small-to-medium enterprises financial services franchise. The risk appropriate capitalisation, sound liquidity position, adequate loan loss reserves and extended track record of sound performance in a challenging operating environment, were also factored into the ratings.
The group underwent a significant reorganisation in F14, which saw the establishment of a non-operating holding entity, EGHL, effective 31 December 2014. Prior to this, EBL, the group’s commercial bank in Kenya, served as the holding company of the group’s subsidiaries and associates, including banking operations in Uganda, South Sudan, Rwanda and Tanzania. The ratings also reflect the group’s strong management team, which has been bolstered following the set-up of EGHL, staffed with high-profile hires to provide support and oversight for the group’s local and foreign subsidiaries.
In line with its expanding African vision to champion socio economic progress on the continent via inclusive financial products, the group is expanding its presence beyond the East African region. Accordingly, EGHL expects to conclude its acquisition of ProCredit Bank Congo, which is based in the Democratic Republic of Congo, by end-2015. The group’s external assets (outside Kenya) contributed 20.5% of EGHL’s consolidated assets at FYE14 (FYE13: 18.2%).
The group is adequately capitalised for current risk levels, with a total risk weighted capital adequacy ratio of 20.9% at FYE14 (FYE13: 25.7%). Asset quality indicators improved during F14, supported by loan growth, improved collections and a slowdown in new non-performing loan (“NPL”) formation. Gross NPLs declined to 4.2% of gross loans and advances at FYE14 (FYE13: 5.2%), which compared favourably to the domestic banking industry average of 5.6% in F14 (F13: 5.2%). The group targets a gross NPL ratio of less than 5%. Arrears coverage by specific provisions increased to 70.8% at FYE14 (FYE13: 51.5%), pre-collateral. NPLs are fully covered after taking into account the fair value of collateral. However, collateral realisation is considered a problematic and lengthy process in operating jurisdictions. Notwithstanding this, relative to capital, net NPLs were low at 4.0% at FYE14 (FYE13: 7.5%).
Consolidated pre-tax profit rose 17.7% YoY in F14 (F13: 9.1%). Earnings growth was supported by the expansion of the credit portfolio, lower impairment charges, growth in non-interest income, and gains from the disposal of an associate company. Overall, the ROaE and ROaA increased slightly to 29.7% and 5.5% respectively in F14. The liquidity ratio was maintained well above the prudential minimum of 20% throughout F14 and 1H F15.
EGHL’s accorded national scale credit ratings reflect a critical assessment of the group’s market position, prospects, performance, and risks, on an absolute basis and relative to those of other leading rated players in the Kenyan and East African regional banking markets. In particular, the requirement of national scale credit ratings to express risk in relative rank order (providing an ordinal measure of credit risk which is not predictive of a specific frequency of default or loss), within the context of Kenya’s highly fragmented banking sector, which has significant potential for medium-term sector consolidation, informed this view.
GCR takes note of the group’s strategic reorganisation for growth and expansion, and for improved efficiency in management and control of the group. A ratings upgrade would be premised on the successful repositioning of the group in regard to the expanding geographical reach and scope of operations. Further, strong asset quality indicators, a positive earnings trend (while maintaining credit protection factors), and further strengthening of the group’s competitive position, may have a positive impact on the ratings. Downward pressure on the ratings could arise from sustained pressure on profitability stemming from a sharp rise in loan loss provisions, inadequately controlled growth and a higher susceptibility to regulatory, political and economic changes across operating jurisdictions, or from a marked decline in liquidity or capitalisation.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Jul/2005)
Long term: A(KE); Short term: A1-(KE)
Last rating (Aug/2014)
Long term: AA-(KE); Short term: A1+(KE)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Kenya Bank Statistical Bulletin (June 2015)
EGHL rating reports (2005-14)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Equity Group Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Equity Group Holdings Limited with no contestation of the rating.
- Audited financial results of the group as at 31 December 2014 (plus four years of comparative figures)
- Unaudited interim results of the group as at 30 June 2015
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Equity Group Holdings Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset Quality||Asset quality refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||An audit report is a written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Franchise||Business or banking franchise; a bank’s business.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
For a detailed glossary of terms utilised in this announcement please click here